Margin Improvement 2: Setting the objective

During the commercial workshops that we run we talk a lot about shopping habits. We run a simple exercise, we go around the room and ask where people do their weekly grocery shop. It generally runs to the well-known brands, Tesco, Waitrose, Aldi and so on, there are a few surprises. Increasingly people tell us that they are ordering online, and others tell us that they have no preference, that they shop on their way home. Then we ask, why Tesco, why Aldi and so on. The answers range from locality and convenience to familiarity with the layout and product range.

When we ask the same group of people why their customers buy from the companies they represent the answers tend to differ. We are excellent at sales, we are excellent at customer services and we have the lowest price.

The differences between high street supermarket and telecoms reseller are obvious; assisted and unassisted sales, repeat purchases and one off investment purchases. So the comparison is not meant to be direct, but it does demonstrate that purchase decisions are common and can be applied to our own business. Where the hight street supermarket excels at resonating with the consumer, if we are unable to articulate our value, or understand why our customers buy from us, then there is little chance that the customer is going to be able to either.

So, how does this apply to Margin Improvement?

When planning your margin improvement programme, you can simply raise your prices and hope that your customers don’t notice, or suffer from too much apathy to do anything about it, and you will achieve an increase in margin by doing so. This is likely to be short term and if you haven’t set an objective upfront then how do you know whether you have been successful or not? Setting the margin improvement objective should be carefully considered and tie in very closely to your business objectives, your brand and most importantly your customer.

Margin Improvement is the art of the possible, set within the context of your customers’ expectations of the service and value that you provide. If we return to the supermarket example if you always buy bread from one supermarket as part of a much larger shop and the price of bread doubles, you are unlikely to change your habits. However, if you only buy bread from that shop and the price doubles you are likely to go somewhere else.

Once you have completed the situational analysis talked about in a previous blog post then you can set achievable targets for your objective. You will be able to do this by linking those numbers to your business objectives and your MI objectives.

For example, your MI objectives might read;

Number of customer to stay static, or fall by no more than %

Number of products per customer to stay static

Revenue per customer to increase by %

Margin per customer to increase by %

Revenue per product to increase by %

Margin per product to increase by %

Churn to increase by no more than %

NB: Not all the %’s are the same in this example!

Segment your customers into high and low margin customers and treat them separately. Your low margin customers (and I am talking about actual contribution to your business rather than percentage margin here) are more likely to be sensitive to price changes. If they only spend £15 per month with you, a rise of £5 to their monthly bill is going to represent a huge increase in their budget, whereas if they spend £1,000 per month, less so.

Identifying those customers by product and contribution is the way to work your margins in a much more effective way. Fortunately, most billing engines give you the ability to analyse and segment your customers in this way, if not, then manipulating the information in something such as Excel is an excellent way to identify your margin opportunities.

After you have set your objectives the next step is to define and communicate your strategy.